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Employee-owner contracts create two-tier workforce

Mark Shulman examines recent government proposals for an employment contract where UK employment rights can be exchanged for rights of ownership in the form of company shares.

Shares for rights

Under the new type of contract, employees will be given between £2,000 and £50,000 of shares that are exempt from capital gains tax on any growth in value of the shares. In exchange, they will have to give up various UK employment rights including the right to bring unfair dismissal or redundancy claims and the right to request flexible working. If an employee-owner leaves or is dismissed, the company would be able to buy the shares back at a reasonable price.

The thinking is that workers would be more closely linked with the success (or otherwise) of the company they worked for, and so be more engaged. Companies of any size will be able to use this new kind of contract, but it is principally aimed at fast growing small and medium sized companies. For existing staff, employee-owner status will be optional.

The Government intends to consult on some details of the contract later this month and legislation to bring in the new employee-owner contract is planned so that companies can use the new type of contract from April 2013.

Where does this leave employers?

First, there may be difficulty in selling the idea to potential new staff and so your recruitment could suffer. Many employees might not find the idea attractive, given the risk of a fall in value of their shares and their potential low-value. Whilst it is proposed that you will be able to buy back the shares at a "reasonable price" on an employee's dismissal, this may represent insufficient incentive for employees to forgo the right to claim unfair dismissal.

Second, few small businesses will probably want to tie themselves up in the tangle of red tape which is likely to be necessary to trigger the new contracts. Therefore, if you are a small business, you may prefer to stick to the more traditional model of employment contracts. New employees do not normally have unfair dismissal rights until they have been in post with you for two years. So you have plenty of time to see how they are performing without risking unfair dismissal claims if their employment is terminated within that period.

The new style contracts are likely to be most useful where you were going to offer shares in the business anyway, perhaps under an existing share scheme. Whilst you would be offering shares as you would have done under a normal employment contract, the new employees would as employee-owners, have to waive certain of their employment rights as part of their employment package. This potentially leaves your business with fewer employment liabilities.

Third, if you decided to use a combination of both the new employee-owner contracts and the more usual type of employment contract, you would end up with two different types of workers - those that have full employment protections and those that do not. This is likely to make it much more difficult for you to manage a cohesive and harmonious workplace, especially in making decisions as to who goes and who stays.

We shall have to see what transpires following the government's consultation. Meanwhile, all employers should ensure that they have up to date contracts of employment for their staff. This is necessary not only because certain job particulars are required to be given by law, but having a record of what has been agreed should help to avoid challenges and claims.